5 warning signs in the real-estate market that recall the mid-2000s housing bubble

housing
  • Several gauges of housing market activity mirror trends seen just before the bubble burst in 2008.
  • Experts see the current boom as far safer than the prior rally, citing stronger lending requirements.
  • Still, here are trends ranging from home prices to construction activity that resemble 2005 and 2006.
  • See more stories on Insider’s business page.

Housing-market monitors keep repeating the phrase “since 2005,” except when it’s “since 2006.” That’s worrying – both superlatives refer back to the peak of a historic real-estate bubble.

Low mortgage rates and massive demand have powered a supercharged rally for US housing over the last year. Americans snapped up nearly all the available supply of new and previously owned homes amid huge population shifts from cities to suburbs. Chronic underbuilding after the financial crisis left contractors struggling to meet the new demand with adequate supply. That imbalance has since pushed selling prices skyhigh.

The boom’s frenetic nature has led many to compare the current market with that seen just before the infamous 2008 crash. Experts have been quick to note that, while some similarities exist, the latest price surge has more to do with a lack of inventory than dubious lending standards.

“I don’t see the kind of financial stability concerns that really do reside around the housing sector,” Federal Reserve Chair Jerome Powell said last month. “We don’t see bad loans and unsustainable prices and that kind of thing.”

But just because the market looks different on a macro level doesn’t mean there aren’t strong similarities to the period just before the bubble burst. Here are five housing-market signals flashing the same signs seen about 15 years ago.

(1) CoreLogic Home Price Index

Possibly the most basic indicator of just how much demand has outstripped supply is nationwide price indexes.

The headline price gauge for housing-data authority CoreLogic soared 11.3% year-over-year in March, according to a Tuesday report. That marks an acceleration from the February rate of 10.4% and the fastest rate of price growth since March 2006. On a month-over-month basis, prices rose 2% from their February levels.

The financial analytics firm sees that momentum cooling over the next year. A persistent wearing-away of home affordability will likely curtail some purchases, and accelerated construction will shore up supply in the months ahead, CoreLogic said. Still, year-over-year price growth should reach 3.5% as lingering demand keeps the rally alive, Frank Martell, the president and CEO of CoreLogic, said in a statement.

“With prospective buyers continuing to be motivated by historically low mortgage rates, we anticipate sustained demand in the summer and early fall,” he said.

(2) S&P CoreLogic Case-Shiller Index

Separately, a more city-focused measure of home-price inflation notched a similar reading last week. Home prices in metropolitan areas gained 12% year-over-year in February, according to the S&P CoreLogic Case-Shiller Home Price Index, the headline index of US home prices for more than three decades. The reading signals the strongest price growth since 2006 and edged slightly higher from the prior annual gain of 11.2%.

Inflation was broad-based. All 20 cities saw home prices climb, and 19 cities saw year-over-year price growth accelerate from January to February. Prices rose the most in Phoenix, San Diego, and Seattle, according to S&P.

(3) Selling prices for new vs. previously owned homes

Digging deeper into home sales reveals an unusual phenomenon unseen since the previous boom. For the first time since 2005, Americans spent more on previously owned single-family homes than on new construction, according to March housing data from the Census Bureau and the National Association of Realtors.

The dynamic signals Americans are prioritizing buying any available home instead of hunting down a new unit.

To be sure, monthly sales data is volatile and the premium for new homes could reemerge in April data. But with supply still under pressure and CoreLogic’s Tuesday report showing prices broadly climbing higher last month, the phenomenon might linger for some time.

(4) Home starts

As gauges of market demand soar to 15-year highs, so have measures of upcoming supply. Housing starts surged nearly 20% in March as contractors rushed to address the lack of new homes for sale. The leap places the annual rate of starts at its highest since 2006 and serves as the largest month-over-month gain since 1990. Permits for new residential construction also increased, albeit at a slower rate.

The rebound was somewhat prompted by winter storms curbing construction activity in February. But for the most part, a historic shortage of available homes fueled the pickup in building. Just 1.07 million existing homes were up for sale in March. That sum, at the current purchase rate, would be snapped up in only two months.

Homebuying has slowed from its pandemic-era peak, giving contractors slightly more time to meet the elevated demand. With millennials hitting peak homebuying age and lumber prices expected to decline, some economists see the rebound in construction paving the way for more moderate price growth.

(5) Home equity take-out

The sustained acceleration of home price growth has also lead owners to take out equity at the same rate seen in the mid-2000s. Homeowners refinancing their mortgages pulled roughly $50 billion in equity out of their homes throughout the fourth quarter of 2020, according to data from Freddie Mac and the Urban Institute.

Mortgage rates, while still at historically low levels, reversed their pandemic-era decline through the first quarter as investors braced for the economic recovery to give way to higher borrowing costs. Those higher rates erased the rate-reduction incentive for refinancing, making equity take-out the top reason to refinance, the Urban Institute said in a report published April 27.

Although equity take-out on its own is normal, the sharp uptick seen last year could be cause for concern. Some economists have criticized the Fed’s ultra-accommodative policy for encouraging risk-taking across various markets. Increased equity take-out presents new financial risks for participating homeowners since a decline in home prices from their skyhigh levels could cut deeply into their balance sheets.

And while equity take-out sits at its 2005 level, it is still well below the 2006 peak. Yet with mortgage rates expected to climb over the next few years, take-out refinancing could accelerate further.

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The Fed is watching housing ‘carefully’ and hopes builders catch up to the red-hot market, Chair Powell says

Jerome Powell waits to testify before the Senate Banking, Housing and Urban Affairs Committee on his nomination to become chairman of the U.S. Federal Reserve in Washington, U.S., November 28, 2017.   REUTERS/Joshua Roberts
Federal Reserve Chair Jerome Powell.

  • The Fed is “carefully” watching the housing market as huge demand sends prices soaring, Chair Jerome Powell said.
  • The central bank doesn’t see “the kind of financial stability concerns” that fueled the 2008 crash, he added.
  • Powell said he hopes homebuilders react “and come up with more supply,” which would also boost job growth.
  • See more stories on Insider’s business page.

The housing market boom has caught the Federal Reserve’s attention.

By several measures, the US housing market is running at its hottest level since the mid-2000s bubble that nearly crashed the global financial system. Prices have surged at decade-high rates, and homebuying, while slowed from recent highs, remains elevated. What began as a pandemic-era rally has since raised concerns that soaring prices are eroding home affordability just as the US economy rebounds.

The market frenzy is being “carefully” monitored by the Fed, but there’s little reason to fear another nationwide crash, Fed Chair Jerome Powell said in a Wednesday press conference. The subprime lending and speculative purchasing that fueled the 2008 meltdown aren’t nearly as abundant this time around, making for a “very different housing market” than that seen a little over a decade ago, he added.

“I don’t see the kind of financial stability concerns that really do reside around the housing sector,” Powell said. “We don’t see bad loans and unsustainable prices and that kind of thing.”

Much of the boom is driven by demand significantly outstripping supply. Home inventory sits near record lows, and while housing starts recently leaped to the fastest rate since 2006, it will take some time for construction to equate to new supply.

Powell acknowledged the imbalance and highlighted that a bounceback in supply could also serve the labor market’s recovery.

“My hope would be that over time, housing builders can react to this demand and come up with more supply, and workers will come back to work in that industry,” he said.

Some of the current market strains can be tied directly to fallout from the 2008 crisis. The intense homebuying activity seen throughout the 2000s drove a boom in new construction. The rally lasted for years until dubious lending brought the market toppling down. Construction came to an almost-complete stop, and while it trended higher through the 2010s, it failed to retake levels seen during the prior decade’s surge. That building deficit is just now coming back to bite prospective homebuyers.

“We’ve been underbuilding for years,” Gay Cororaton, director of housing and commercial research for the National Association of Realtors (NAR), told Insider’s Hillary Hoffower.

While the Federal Reserve has little direct influence on the housing market, the central bank’s promise to hold interest rates near zero for the foreseeable future places downward pressure on mortgage rates. Lower borrowing costs help lower the barrier to entry for potential buyers, as would the previewed jump in supply.

Signs point to demand holding up even as supply recovers. Nearly 9% of Americans plan to buy a home in the next six months, according to The Conference Board’s latest consumer confidence report. That’s the largest share since 1987.

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The housing market is the hottest it’s been since right before the 2008 crash – but there’s far less bubble risk this time around

buying home
  • Home price growth and construction are the hottest they’ve been since 2006 – the peak of a housing bubble.
  • Despite the similarities of some housing data from 15 years ago to today, experts see two very different markets.
  • Conditions driving this market boom are “fundamentally, radically different,” an economist told Insider.
  • See more stories on Insider’s business page.

Housing data is hitting levels unseen since 2006 in at least three different ways, begging the question of whether this is another bubble. Experts say this isn’t that – it’s economics.

Another housing bubble 15 years after the last one would be very bad news, as the epic pop of that market in 2008 threatened the stability of the entire global financial system. But while today’s price inflation is similar to then, the drivers behind this market rally look different.

Nationwide home prices grew 12% year-over-year – their fastest pace since 2006 – this past February, according to the S&P CoreLogic Case-Shiller Index. Gains were broad-based, with all 20 cities tracked by the index experiencing price growth above their respective median levels.

Separately, CoreLogic’s own home-price index also recorded the highest annual leap since 2006 in February. That gauge tracks home prices across the country, while S&P’s index measures prices in 20 metropolitan areas.

Also, for the first time since 2005, the median sale price for previously owned single-family homes is higher than that for new construction. In other words, the premium Americans typically pay to be the first to live in a new house has been completely erased as homebuyers have rushed to buy any home on the market.

“The conditions underlying what happened way back then, during the bubble of ’05 and ’06, and what’s driving price growth today are just fundamentally, radically different,” Frank Nothaft, chief economist for CoreLogic, told Insider.

Where dubious lending and market euphoria powered the mid-2000s surge, today’s boom is almost entirely due to a nationwide supply shortage. The monthly supply of homes sits near record lows of about 3 months, leading sellers to demand increasingly large sums for their properties. That compares to more than 12 months of supply in 2009.

Today’s market is also backed by a strong underwriting process and isn’t engulfed in a subprime mortgage crisis, Nothaft explained. The price growth we are currently experiencing, he continued, “is rooted in economics.”

Record low mortgage rates and the heightened focus on space have sent buyer demand through the roof, but a pullback from prospective sellers and a lack of newbuilds have resulted in a national decline in homes for sale.

“When you put all these pieces together, increase in demand and limited supply, it pushes prices up and that’s what we’re seeing in the marketplace,” Nothaft added.

Learning from post-crisis mistakes

Other gauges aren’t just at their hottest levels since 2006, but their hottest levels full-stop. The median selling price for existing homes touched a record high of $329,100 in March, according to the National Association of Realtors. And though the supply of previously owned homes has edged higher in recent months, it’s still close to February’s all-time low of 1.03 million units.

“We’ve been underbuilding for years,” Gay Cororaton, director of housing and commercial research for the National Association of Realtors (NAR), told Insider.

The shortage can be traced back to that 2008 housing crash and its long-term fallout. The buying frenzy seen throughout the 2000s had fueled a boom in new construction as builders rushed to meet unprecedented demand. But once the bubble burst, contractors pulled back on building in an effort to prop up demand. Construction rebounded slowly through the last decade, leaving the market with diminished inventories once the pandemic-era boom began.

Daryl Fairweather, chief economist at Redfin, told Insider that the last decade saw a massive drop-off in homebuilding. Fewer homes were built by a factor of 20 going all the way back to the 1960s, she said.

But the latest data suggests contractors are finally heeding the market’s call. Home starts leaped nearly 20% last month to the highest level since, you guessed it, 2006. The reading also marks the largest month-over-month increase since 1990, underscoring the urgency faced by homebuilders.

Americans also seem prepared to keep the market boom alive for at least a while longer. The share of consumers planning to buy a home in the next six months rose to 8.9% in April from 8.1%, according to The Conference Board’s Consumer Confidence Index. That’s the highest proportion since 1987.

With millennials reaching peak homebuying age, supply bouncing back, and mortgage rates expected to move up slightly, economists don’t expect the housing rally to pop, but instead settle into more sustainable growth.

“I think we will return more to the trend that we were seeing pre-pandemic,” Nothaft said, which showed steady national price growth in the single digits. In February 2020, home prices increased by 4.1% year-over-year.

For millennials, who are entering or at peak homebuying age, that would represent a return to a pre-pandemic dynamic of record low mortgage rates but a housing market that still felt out of reach. It may not be a bubble, but it isn’t exactly attainable, either.

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US home prices jumped the most in 7 years in December as the housing-market boom charged into the new year, Case-Shiller says

FILE PHOTO: Homes are seen for sale in the northwest area of Portland, Oregon March 20, 2014.  REUTERS/Steve Dipaola
Homes are seen for sale in the northwest area of Portland, Oregon.

  • The S&P Case-Shiller US home-price index rose to a 10.4% annualized increase in December, up from 9.5%.
  • The reading marks the strongest pace of price growth in seven years, according to a press release.
  • The data suggests the US housing market ended 2020 strong amid low inventory and record-low mortgage rates.
  • Visit the Business section of Insider for more stories.

US home prices surged through the end of 2020 as record-low mortgage rates kept demand at elevated levels, and a general inventory shortage propped up prices.

The S&P CoreLogic Case-Shiller US National Home Price Index posted a 10.4% annualized increase in December, according to a Tuesday press release. The gain follows a 9.4% annualized climb in November and marks the biggest single-month leap in seven years seen by the index, a leading national dataset.

S&P Dow Jones Indices’ 10-City Composite index rose to an annualized gain of 9.8% from 8.9%. The 20-City Composite rose to a 10.1% year-over-year jump from November’s 9.2% reading.

Phoenix, Seattle, and San Diego saw the biggest home-price increases among the 19 cities surveyed in December.

“These data are consistent with the view that COVID has encouraged potential buyers to move from urban apartments to suburban homes,” Craig Lazzara, managing director and global head of index investment strategy at S&P DJI, said in a statement. “This may indicate a secular shift in housing demand, or may simply represent an acceleration of moves that would have taken place over the next several years anyway.”

The housing market was one of the few pockets of the economy to see explosive growth through 2020 as new buyers rushed to scoop up dwindling inventory. The Federal Reserve’s decision to drop interest rates to nearly zero in March 2020 dragged on mortgage rates and, along with the onset of the work-from-home era, sparked a homebuying spree. The surging pace of sales for new and existing homes quickly left contractors struggling to keep up.

Though the Tuesday release shows the housing market’s rally set to continue into 2021, momentum has wavered in recent weeks. After the 30-year fixed mortgage rate sank below 3% for the first ever in mid-2020 and stayed there for months, it turned higher in mid-January, signaling the buying frenzy could soon cool.

This shift was one of several January and February datapoints indicating investors are growing wary of inflation leaping higher as the economy recovers. Rising inflation would likely correspond with rising mortgage rates and, in turn, slow home-price growth.

Still, the US housing market will likely thrive through 2021 as more forthcoming stimulus bolsters homebuying activity, Fitch analysts led by Suzanne Mistretta said in a February 16 note. The firm said it expects prices and mortgage volume to continue growing in 2021 due to consistently low borrowing costs and lasting supply constraints. Demand is likely to outpace supply until the effects of the coronavirus pandemic fade, the analysts said. In other words, there won’t be enough homes to go around for a while yet.

Market health could waver should job losses creep into previously unaffected industries and hit higher-income workers, the team added.

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US home prices rose at a record pace in the 4th quarter, surpassing the previous peak in 2005

housing expensive

The median price of a single-family home climbed 14.9% to $315,000 in the fourth quarter, according to the National Association of Realtors.

That’s the fastest pace of growth on record, surpassing the top from the last housing boom in 2005, according to data compiled by Bloomberg.

Every single metro area tracked by the NAR saw home prices grow from a year ago, while 88% (161) of the metros saw double-digit increases, compared to just 115 metros in the third quarter. It’s a sign of the continued housing boom in the US as mortgage rates remain in record-low territory.

The area with the highest price gain was Bridgeport, Connecticut, where prices soared 39%. By region, the Northeast experienced a 20.7% price increase, followed by the West at 15.5%, the Midwest at 15.1% and finally the South at 14.0%.

“Mortgage rates reached record lows, thereby driving up the demand,” said Lawrence Yun, NAR chief economist. “At the same time, inventory levels also reached record lows, leading to grim inventory conditions of insufficient supply in the fourth quarter.”

While Yun noted that low mortgage rates are helping Americans afford their monthly payments, he said that large home price spikes could soon become detrimental to homebuyers. 

“The average, working family is struggling to contend with home prices that are rising much faster than income,” he said. “This sidelines a consumer from becoming an actual buyer, causing them to miss out on accumulating wealth from homeownership.”

The NAR found that families typically spent 14.8% of their income on mortgage payments, compared to 14.9% one year ago. With higher home prices, the average monthly mortgage payment marginally rose to $1,040 from $1,020, even as mortgage rates dropped significantly. 

Read more: Barclays says buy these 33 beaten-down stocks that are perfectly poised to capitalize on the reopening of the economy in the years ahead

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